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SCMP Reporter

LIKE rotten fruit falling from a tree, Japanese construction companies, ripe with bubble debt, are plunging into bankruptcy.

 In the past month, three major contractors have gone under and analysts say there are at least 20 of the more than 100 listed general contractors on the verge of bankruptcy.

 The massive wave of insolvency is predicted for two main reasons: one is that many companies can no longer hide the burdens they carry from Japan's burst bubble; the other is that there are simply too many companies around.

 According to the construction ministry there were 564,849 construction companies in Japan in March this year.

 That is one for every 200 men, women and children in the country. With public works being cut sharply and private housing starts in a slump, a long overdue bloodbath is beginning, analysts say.

 The latest casualty was Mitsui Construction, which threw itself to the mercy of other members of the Mitsui group of companies last week after admitting it could no longer go it alone. Mitsui Group companies, including Sakura Bank, have promised to help the company deal with its 493 billion yen (HK$32.4 billion) worth of liabilities but will force it to cut staff and make other sacrifices.

 Tokai Kogyo, which went under in July with debts of 511 billion yen and Tada Corp, sunk under a 171 billion yen burden during the same month, did not have any rich cousins to bail them out and have filed for bankruptcy. Also in July, banks agreed to write off 100 billion yen from the 740 billion yen debt held by the company that took over the now defunct Tobishima Construction.

 Smaller companies are not exempt either. From January to July there were 2,118 construction bankruptcies, up 20 per cent from the same period last year, according to Teikoku Data Bank.

 The total debts left by such bankruptcies was 840 billion yen in July alone, a record, the company said.

 'The industry faces a mountain of bad news and banks are starting to pull the plug on them,' it said.

 Although banks have more than 30 trillion yen in loans to the construction industry, banking analysts say there is no data available to allow investors to guess how much of that debt is rotten.

 'There is a submerged problem we are not able to guess at from the published data,' Akira Takai, an analyst at Daiwa Securities, said.

 Japan's murky accounting standards have allowed the contractors to hide their liabilities for the past five years, the analysts said.

  'Construction companies' problems are non-payment for work completed, hidden losses in land they bought during the bubble, indebted land redevelopment subsidiaries and guarantees they made on loans taken out by now-bankrupt customers,' said Hiroshi Kato, Daiwa's construction sector analyst.

 'Banks are realising that they cannot keep all construction companies afloat so the selection of those that must perish has begun.'  The slaughter has already started in the stock market: construction company stocks that sold for over 500 yen as little as two years ago can now be bought for less than 100 yen or the price of a pack of bubble gum. A few forward-looking investors have already begun snapping up, at bargain prices, stocks in companies that look likely to survive, a trader at Nomura Securities said.

 The Japanese Government, worried about the danger of massive unemployment and a domino effect of bankruptcies, recently announced a set of measures aimed at alleviating the problem, according to Kenji Kubo, a Construction Ministry official. 'The Government is going to try to give more contracts to medium-sized companies and will no longer automatically cancel contracts with bankrupt or money losing contractors,' he said.

 These measures may not help, given the fact that the public works budget for next year has been cut by 10 per cent.

 After years of pouring tens of trillions of yen into the construction sector through public works, the government's hand has been forced by the largest budget deficit in the OECD, economists say.

 Media attention has also been focused recently on the incredible waste and corruption in Japan's public works.

 Stories about fishing ports without fishing boats, unused rural airports and roads leading to nowhere abound.

 A data-bank search of the Asahi Shimbun Newspaper's 1996 issues revealed over 1,500 articles that contained the words public works and corruption.

 The Nihon Keizai Shimbun Newspaper, for its part, recently estimated that public works cost on average 20 per cent more than the equivalent private sector projects. The result is perhaps as much as 10 trillion yen wasted per year, enough to eliminate the nation's budget deficit.

 Politicians, for their part, despite the cutbacks, are actually trying to squeeze more donations out of the construction industry than before, according to an official at one construction company. 'We are trying to pay them what they ask because in this climate of budget cutting, we need as much influence as we can get,' he said.



Japan construction industry falls victim to bankruptcy